India keeps policy rate unchanged, sounds tough on inflation

MUMBAI (Reuters) - India’s central bank kept its key policy repo rate unchanged on Tuesday as widely expected, and voiced a commitment to bringing down inflation that convinced many analysts that markets will have to wait until next year for the next cut in rates.

The Reserve Bank of India (RBI) left the repo rate INREPO=ECI at 8.00 percent, as expected by nearly all 43 economists surveyed by Reuters for a poll published last week. The repo rate has been unchanged since January, when the RBI increased it by a quarter percentage point.

“The upside risks to the target of ensuring CPI inflation at or below 8 percent by January 2015 remain, although overall risks are more balanced than in June,” Governor Raghuram Rajan wrote in the RBI statement on its policy review.

Rajan stressed that the next goal was to bring inflation down to 6 percent by January 2016, while warning of upside risks to that target also.

Analysts said the RBI statement could put to rest any prospect of rate cuts for a while, with many ruling out the chances of any reduction this year.

“I think we will be in a pause mode for an extended period of time,” said Mohan Shenoi, treasurer at Kotak Mahindra Bank.

The RBI did, however, announce steps to free up resources for banks to lend, a priority for Prime Minister Narendra Modi’s government as it seeks to encourage investment in order to put momentum back in sluggish economic growth.

The central bank said it would continue to focus on spurring more lending and lowered banks’ minimum bond holding requirements, known as the statutory liquidity ratio (SLR), by half a percentage point to 22.0 percent of deposits to free up more money for lending, effective from Aug. 9.

The RBI also cut the ceiling on debt that must be held-to-maturity (HTM) by lenders half a percentage point to 24 percent.

It did not provide an estimate on how much credit growth that could spur.

The measures come after the RBI had also cut the SLR by half a percentage point in June.

India’s benchmark 10-year bond IN088323G=CC fell, sending its yield up 9 bps to 8.82 percent, as cuts in both the SLR and HTM are likely to pressure bond prices due to new supply.

The partially convertible rupee strengthened to 60.73/74 per dollar versus Monday’s close of 60.93/94, partly due to the RBI’s caution over the prospects for rate cuts.

Rajan again reiterated a commitment to developing money markets after introducing term repos, or cash for loan transactions in 7- and 14-day increments, this year.

INFLATION TARGETS

The RBI retained its economic growth forecast of 5.5 percent for 2014/15, depending on whether monsoons or geo-political tensions intensify.

The crucial goal for India is the creation of enough jobs to absorb its rapidly increasing workforce, and growth of below 5 percent in each the last two years was far below what was needed. Industrialists have been calling for lower interest rates, but for sustainable growth, inflation has to be conquered first, and the RBI said there were upside risks.

In June, the retail inflation rate was the lowest since the government started publishing the data series in January 2012, with the consumer price index (CPI) INCPIY=ECI showing a 7.31 percent rise from a year earlier.

Following a weak start to the monsoon rains, food price inflation remains one of the biggest challenges for India, despite government measures to curb hoarding of food articles and setting limits on the export of onions and potatoes, two staples in Indian cooking.

Rajan said the pressure was on to meet both inflation targets for 2015 and 2016.

“We are getting close to the end of the year when our first target has to be met,” Rajan told a news conference after the review. “We need to also be confident in reaching the 6 percent (target).”